Starbucks' U.S. Diversification And International Expansion Are Key To Earnings

Starbucks Corporation (NASDAQ:SBUX) is scheduled to announce its Q2 earnings on April 25. The stock has gained almost 25% in the last six months on a couple of solid quarterly earnings and a general upbeat about the American economy. Overall, Starbucks’ strategy is to diversify its offerings in the relatively saturated American market while leveraging its brand to expand internationally. Here are some of the trends to watch out for in the upcoming earnings release.

Strong U.S. Sales

The U.S. is the backbone of Starbucks with more than 60% of its global stores operating in the world’s largest economy. The company’s same-store sales in the U.S. have consistently grown 6%-7% over the last few quarters, which is quite impressive for a mature restaurant chain. Moreover, this figure is sustainable as the company looks to generate more revenue through its expanded food offerings.

Currently, Starbucks is in the testing phase of La Boulange products in select stores and plans to roll out the entire range in its 2,500 company-operated stores across the U.S. beginning of spring 2013. La Boulange is a San Francisco-based bakery chain that Starbucks acquired last year for $100 million. Only a third of Starbucks’ transactions consist of food orders and, naturally, the company sees an opportunity to grow this figure.

Same-store sales growth is an important parameter to gauge a restaurant chain’s performance since it excludes the effect of currency fluctuations and only includes the restaurants open for more than a year. Sales of newly opened restaurants could be unusually high or low and can distort the overall revenue/store figure.

Global Expansion

Starbucks is in the midst of a major expansion with plans to add 1,300 new stores by the end of the fiscal (i.e., Oct. 2012 to Sept. 2013). Most of the additions will be in Asia-Pacific and Americas region. The company has set its eyes on China as a key market as it looks to grow the store count in the region to 1,500 by the end of 2015. The world’s most populous nation will surpass Canada as the second most important market for the company in the next two years.

The company-wide operating margins should continue to expand due to a greater mix of licensed restaurants. Licensed stores usually have margins three or four times higher than those of company-operated stores so a greater proportion of licensed stores will have a tendency to expand the overall margins. More than half of Starbucks stores are company-operated currently, but the company has lately shown a preference for licensed stores. Therefore, it won’t be surprising to see the company-wide margins widen.

Channel Development

The channel development segment includes packaged coffee/tea as well as K-Cups and brewers sold through third party retailers. Their sales were up 13% to $380 million in the previous quarter helped by K-Cups sales and the introduction of the Verismo in September. Starbucks plans to double the international footprint of this segment within the next three years. The sales of this division should continue to grow strongly as the company keeps expanding into new geographies and rolls out new products.